My comments are not in this post, but I will repeat them here (they are in line w/ TPC to some degree):

The last QE (#1) resulted in nothing more than an asset swap. Big Bank reserves were blown up as the Fed blew up the money supply (big time).

Big Bank turned around and bought Treasuries. Hey who wouldn’t? The Fed charges you 0.25% on the reserves and you take this money and invest it and get 3-5% on the investment! Coolio!@!

But that is EXACTLY what Big Bank did!

And that effort enabled Big Bank to shore up their capital requirements (recall that banks have 2 requirements that they need to meet: RESERVE & CAPITAL requirements: former is against deposits, latter against their ASSETS which equal (non-performing) loans. Banks are NEVER reserve-constrained. They are CAPITAL constrained (non-performing loans!)

And why did they do that?

Fellas, we’ve got a “balance-sheet” depression going on here in the households (aka HHs), and as well, the corporations (CORPs)!

Big Bank is UNWILLING to loan due to poor credit assessments on HHs/CORPs and the private sector is UNWILLING to BORROW – `cause they are BROKE and are NECK DEEP in debt!

Wow, that sure is a no-brainer!@!

And so, Heli-Ben basically saved Big Bank from a complete bankruptcy process (all at the same time) to save the economy – he might be declared a hero later in future history as we unwind this…

But what did not happen is an un-loosing of the credit markets – WHY?

B/c you can’t when everyone is NECK deep in DEBT! Duh!!!

(Oh, btw, this is what is also happening in the Twilight-Euro Zone)

But what annoys me greatly are the Austrians (Scary Gary North, Mugambo Guru, et. alii) that embark on fear-mongering campaigns that complain about the Fed’s balance sheet and fore-tell the ending of this world as we know it – via – massive inflation/hyperinflation.

Dude!@!

Even Milton Friedman understood that inflation of the money supply could only be considered a price inflationary event if Velocity of Money was non-zero!!

But the velocity is hovering around zero now. Did you hear what I just said? Velocity == ZERO!

And when it departs from ZERO, the Fed will drain the reserves in a heartbeat to prevent INFLATION.

I wish them luck in that regard, b/c that would require 2 things:

1) a recovering economy, or

2) a loss of faith in our world reserve FIAT CURRENCY.

All signals actually point to a deflationary period as the HHs destroy/deleverage their debt (strategic defaults!!). Man, we are Japan but even worse so…

I guess the thing that bothers me most about Austrians is that they are INSIDE THE BOX.

They don’t get that we are a fiat monetary system and rant and rave against the REALITY that is – we have a FIAT, non-convertible (to gold), FLOATING (against a basket of other currencies) currency SYSTEM.

This system is a DIFFERENT GAME and allows the Fed to flexibility to target the Federal Funds Targeted Rate (FFTR) – which controls the interest rate and inflation. You could not do this under a Gold-Standard – period. You also could not defend your currency.

The Gold-Standard thinking has come across so many attacks on its lack of flexibility and buried so many developing countries that I am seriously disappointed in the Austrian’s INSISTANCE that it is one the roots of ALL OUR EVILS!!

It just doesn’t seem to work well in a global economy.

But the thing that bothers me most are folks like “Scary Gary” and Marc Faber who rant and rave about the coming hyperinflationary times and how the world is going to end when a $1 bill will buy you 1 sheet of toilet paper w/o due consideration of money velocity and the deflationary REALITY that we are in: debt destruction/deleveraging IS a deflationary event in monetary terms (even when price inflation occurs, both CAN happen at the same time).

Folks, if you have jobs, crank your savings rate to utter maximum and cease all discretionary spending. Put your money in Tsy bonds/bond funds (there ain’t no bond “bubble” out there), but most of all set your expectations in terms of wealth preservation rather than returns and cranks the savings pump through the roof!

Surf’s UP – the ride is going to be wild…

Iluvatar says:

September 8th, 2010 at 1:23 am

@Folks:

Sorry for the last diatribe (sorry just re-read some Mark Twain stories only to find out that my writing style is just like him!).

But anyway.

Folks, I don’t want the last diatribe to reflect a total disagreement w/ Austrians. I just want them to get a handle-hold on our CURRENT monetary system – and stop the complaining & whining, `cause it AIN’T helping things.

I do believe that we need to run a government w/ fiscal prudence – we need to be good fiscal “stewards” in terms of our fiscal & monetary policies – we can’t just hit the digital button on the computer & just spend.

But if we have some belief in MMT/Chartalism over a gold system (which does not exist since the breaking of the Bretton-Woods agreement in 1971), we need to understand that the Fed Gov MUST spend in order to put money into the hands of the private sector.

And how do we do that?

Some suggestions (and I am going to upset Mish greatly here, but he does not get the role of our military – tant pis!):

1) give all folks a wage tax holiday – take a break for a year or so (let’s not discuss the illegality of the wage tax for now – let’s reserve that for another time when I can pose this in a barter/trade scenario that makes this it look ridiculous),

2) have a FICA tax holiday for a year or so – no more taxes funding Social Security, etc.

3) reduce the Fed Gov spending in the following:

a) defense: eliminate our world hegemony – we aren’t the world’s policeman – and there is no contract we’ve signed indicating such. However. maintain a STRONG defense for OUR soil (e.g. Arizona hello!?!?!?! – this ain’t no issue of immigration, it is ABOUT the defense of our border for crying our loud – how deluded can you get????)

4) eliminate about 20 departments in Gov – start w/ Education first and move on down the list – they ain’t listed in Article I, Section 8 of the Constitution to begin with.

“I do believe that we need to run a government w/ fiscal prudence – we need to be good fiscal “stewards” in terms of our fiscal & monetary policies – we can’t just hit the digital button on the computer & just spend.”

The problem, as always, is the “we”.

Mike.

Iluvatar says:

September 8th, 2010 at 11:10 pm

I am going to try this cut & paste – hope it works (closing my eyes)

@ ALL: Darn it! Thought I should’a taken more flak here…

Karen?

Did you filter all the hate messages??

I was trying to open up the serious debate here…

@ Mike: Dude! Truly touche.

Let’s start w/ the opening phrase of the Declaration of Independence, shall we?

“We The PEOPLE”

Amen.

Yes, WE the people MUST take control of our Fed Gov (and our State Gov, etc.).

As Mark Sisson recently pointed out, we need to be “digitally distracted”. We need to gain focus and then act upon that focus & laser through the inequities in our system as well as our Federal government.

WE need to step up to the bar and take responsibility as well, & take control of a Federal Gov that is lost at sea.

Hey alex & clarke – does this resolve the Existentialist conflict?

The common citizen TAKES control!

And when you tick him off ENOUGH, he comes with a vengeance – that’s called an uprising in my book – and we are way past due. The Tea Party stuff is just the beginning – WE THE PEOPLE are much more than that@!

I am going to end this in a way that delivers HOPE and INSPIRATION to you all – it is from the Declaration of Independence (dudes, these are great words):

“That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”…

But here is the part that makes my heart sing:

“But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”

Iluvatar says:

September 8th, 2010 at 11:15 pm

A quick emendation:

As Mark Sisson recently pointed out, we need to be “digitally distracted”.

SHOULD READ AS: As Mark Sisson recently pointed out, we need to be LESS “digitally distracted”.

Short & sweet (for once). A kwik update. I wonder if the banks are prepared for this? After all, we are hearing so much about commercial real estate re-sets and their version of “strategic defaulting” (that curiously bears no moral hazard? LOL) that are now beginning to occur: